Independent power producers
Merchant power generators have been the poorest performers in the last 12 months, considering their huge exposures to commodity prices. However, the uptick in natural gas prices this year has been mirrored in merchant power stocks.
Falling electricity demand growth, grounded natural gas prices, and the increasing use of renewables has weighed on wholesale power prices.
Merchant power players such as Calpine (CPN) are more protected during commodity price falls, as their fuel costs fall along with commodity prices. On the other hand, coal-heavy generators such as NRG Energy (NRG) and Dynegy (DYN) are pressured because they continue to spend heavily on fuels.
However, NRG is comparatively better placed in this challenging environment. It owns some renewables facilities and has a better-performing yieldco.
Policies versus merchant generators
Various government initiatives to curb energy demand are detrimental to merchant power players. For instance, demand-side management motivates end users to use less power during peak loads. Merchant generators, who often charge premiums at peak loads, lose out on their most valuable sources of revenue. Demand response programs incentivize customers to save or reduce usage during peak loads.
Challenges for merchant power players are not lessening. Natural gas (UNG) prices can uplift wholesale power prices, which is likely to boost their stock prices.
NRG Energy, Dynegy, and Calpine are the leading merchant power producers in the United States. They have corrected from 40% to 60% in the last 12 months.